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Last July the IRS granted employers an extra year before it will begin imposing penalties under the employer shared responsibility provisions of the Affordable Care Act (ACA). But there is plenty to do right now to prepare for the 2015 tax season, when the penalties will commence.

In what’s become known as the “play or pay” decision, employers can choose to offer full-time employees heath-care coverage that meets certain minimum requirements, or pay fines and point the workers toward the new public health insurance exchanges.

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On a strictly dollars-and-cents basis, most companies would save money by opting for the fines, but there may be strong competitive motivations for providing insurance. At present it’s expected that few large companies will stop offering coverage, but down through the size spectrum it’s likely that more and more will consider the move.

But regardless of whether an employer wants to play ball with the ACA by offering a health plan, identifying which employees are full-time (defined as those working 30 hours or more per week) is essential.

Because penalty amounts for employers with no health plans will be based on how many full-time employees they have, those who choose to “pay” can’t just watch the game from the stands; they need to conduct measurements of employee hours. And those that plan to avoid penalties by offering health plans may still face fines if some full-time employees buy coverage on the public exchanges with the assistance of premium tax credits provided under the ACA.

Regulations relating to the issues described in this article are set to be finalized soon and may require employers to “call an audible” — that is, adjust their game plans.

Know the RulebookWhen employer penalties become real in 2015, fines — technically, excise taxes — will come in two flavors. An “A” penalty applies if an employer chooses to “pay” rather than “play,” while a “B” penalty may apply even to employers that “play.”

The A penalty (from Section 4980(a) of the ACA) is based on the total number of full-time employees, minus 30, and the fine is $2,000 per employee per year. The B penalty (from Section 4980(b) of the ACA) is $3,000 per employee but applies only to full-time workers who use premium tax credits for buying insurance through a public exchange. With the B penalty being higher per employee, the total penalty is capped at what the employer would owe under the A penalty.

To avoid the A penalty, employers must offer “minimum essential coverage” to at least 95% of full-time employees. The employer avoids the B penalty if its health plan meets minimum value requirements and safe harbor guidelines. The simplest of those compares the employee’s payroll deduction for self-only coverage under the least expensive plan offered to 9.5% of the employee’s wages (as listed in box 1 of form W-2). A key to mitigating risk for either penalty is to understand which and how many employees are classified as full-time.

Create a PlaybookEmployers need to establish a measurement period for determining each ongoing employee’s average hours per week. The period cannot be less than three months or more than 12 months. An administrative period of no more than 90 days can follow to give the employer time to figure out who will and won’t receive coverage during an upcoming “stability” period, and to get employees enrolled or notified of upcoming disenrollment.

The stability period must be at least as long as the measurement period but no less than six months. During the stability period, the IRS assesses A and B penalties, in both cases treating workers as either full-time or part-time as had been established during the measurement period.

Employers are under a tight time frame to find technology and administrative solutions for tracking employee hours. Those planning to use a 12-month measurement period and 12-month stability period for testing employee eligibility effective January 1, 2015, needed to have begun tracking hours in the fall of 2013. To comply with the rules, employers that haven’t been tracking employee hours will have to look back at prior payroll records to populate a compliance system or tool retroactively, and those tools will need to be fully operational by the fall of 2014. That process will occur every year.

Keep Score on Paid and Unpaid HoursQuantifying hours to distinguish employees’ full-time vs. part-time status may not be as simple as looking at the number of hours worked. The measurement must include the hours employees are paid and not working, such as during vacation or, in the case of union workers, layoff, to determine coverage eligibility.

Employers have options with respect to crediting unpaid leave hours. If the employer is subject to the Family and Medical Leave Act (FMLA), it can either credit the employee with unpaid FMLA leave hours, or shorten the measurement period so that it doesn’t include the leave period. Similar rules apply if an employee takes an unpaid leave for jury duty or military service.

Other breaks in employment are not as clear-cut. Basically, if the unpaid break is less than four weeks, then employers must treat the worker as an ongoing employee, but they do not have to count those leave hours during the measurement period.

If the employee is off work for at least 26 consecutive weeks, the employer may treat the employee as a new hire upon return. There is another optional rule, the “rule of parity,” for employees with no credited hours over a period of at least four weeks but less than 26 weeks. Under the rule of parity, if the time of absence is at least four weeks and is longer than the employee’s previous period of service, then the employer can treat the employee as a new hire upon return.

Mary Bauman is an attorney at the law firm Miller Johnson in Grand Rapids, Mich., and Don Garlitz is executive director of bswift Exchange Solutions, a provider of benefits software and services.

3 responses “Don’t Be Sidelined by ACA Delay: Act Now to Avoid ‘Play or Pay’ Flag”

Beginning in 2014, it will be important for employers that are subject to the ACA Shared Responsibility provisions to

1) determine whether employer-sponsored health coverage qualifies as “affordable” under the ACA under one or more of the affordability safe harbor tests, and
2) keep appropriate records of the results.
The W-2 affordability safe harbor proposed in Notice 2011-73 is retained in modified form. This test determines affordability based on whether an employee’s premium contribution for the lowest-
cost, self-only coverage that provides minimum value exceeds 9.5% of the employee’s wages as reported on Form W-2 Box 1 for the calendar year.

The proposed regulations did not provide for any “add backs” to Box 1 wages – for example, for 401(k) or cafeteria plan deductions that are not included in Box 1. Thus, the safe harbor will be applied based on the employee’s unadjusted Form W-2 Box 1 amount. In practice, this could mean that employees earning the same amount with the same healthcare premiums could have different results under this test depending on the amount of their respective pretax deductions, such as 401(k) or other retirement plan contributions and Section 125 (cafeteria plan) elections.

For employees who are not full time for an entire calendar year, wages must be adjusted to reflect the period when the employee was offered coverage. In this case, Box 1 wage amounts should be adjusted by multiplying the Box 1 wages by a fraction, which is the number of calendar months during which coverage was offered, over the number of calendar months the
individual was employed during the calendar year. That wage amount is compared to the employee premium for the months coverage was offered to determine if
the premium exceeds 9.5% of wages during the period coverage was offered. (If coverage was offered or the individual was employed for at least one day during the calendar month, the entire calendar month is counted for purposes of this calculation.)

To qualify for this safe harbor, the employee’s required premium contribution must remain a consistent amount or percentage of all Form W-2 wages during the calendar year (or the portion of each plan year during
the calendar year, for plans with non-calendar year plan years) but may be subject to a dollar limit set by
the employer. An employer can apply this safe harbor at the end of the calendar year or prospectively to set the employee contribution so that the contribution does not exceed 9.5%.

Example: Employee A is employed by a large employer from May 15 through December 31, 2015. The employer offers coverage to Employee A from August 1, 2015 through December 31, 2015. The employee contribution for self-only coverage is $100 per calendar month, or $500 for Employee A’s period
of employment. For 2015, Employee A’s Form W-2 Box
1 wages with respect to employment with X
are $15,000.

To apply the affordability safe harbor, the Form W-2 Box
1 wages are multiplied by 5/8 (5 calendar months of coverage offered over 8 months of employment during the calendar year). Affordability is determined
by comparing the adjusted W-2 wages ($9,375, or
$15,000 x 5/8) to the employee contribution for the period for which coverage was offered ($500). Because
$500 is less than 9.5% of $9,375, the coverage is affordable for 2015 ($500 is 5.33% of $9,375).

New Affordability Safe Harbor Tests
Rate of Pay Safe Harbor – The proposed regulations provide for an additional affordability safe harbor based on an employee’s rate of pay as of the first day of the coverage period (generally the first day of the plan year).

For an hourly employee, who is eligible to participate in the health plan as of the beginning of the plan year, the employee’s required contribution for the lowest- cost, self-only coverage that provides minimum value cannot exceed 9.5% of the employee’s hourly rate of
pay as of the first day of the coverage period multiplied by 130 hours.

For a salaried employee, who is eligible to participate in the health plan as of the beginning of the plan year, the employee’s required contribution for the lowest- cost, self-only coverage that provides minimum value cannot exceed 9.5% of the employee’s monthly salary amount. (For this purpose, an employer can use any reasonable method for converting payroll periods to a monthly salary.)

An employer can use this safe harbor only if the employer did not reduce an employee’s pay during the year, including by transferring the employee to another employer within the same controlled group.

Example: Employee B is employed for the full year of
2015 with an employer that offers minimum essential coverage that provides minimum value. The employee contribution for self-only coverage is $85 per calendar month. Employee B is paid $7.25 per hour for the entire year.
The employer may multiply 130 hours of service by
$7.25 per hour and compare the result ($942.50) to the employee contribution per month ($85). Because $85 is less than 9.5% of Employee B’s assumed income, the coverage offered is treated as affordable for 2015 ($85 is 9.01% of $942.50).

Federal Poverty Line (FPL) Safe Harbor – The proposed regulations added a third affordability safe harbor based on the Federal Poverty Line (FPL). (Individuals below the FPL will generally qualify for Medicaid.) For coverage to be affordable, the employee’s required contribution for the lowest-cost, self-only coverage that provides minimum value cannot exceed 9.5% of the FPL for the applicable calendar year, divided by 12. Employers can use the most recently published FPL as of the first day of the plan year and must use the FPL applicable to the State in which the employee is employed.

Example: Employee C is treated as a full-time employee for the entire calendar year 2015. Employee C is regularly credited with 35 hours of service per week but is credited with only 20 hours of service during the month of March, 2015 and only15 hours of service during the month of August, 2015. Assume that the Federal Poverty Line for 2015 for an individual is $11,170. The employer sets the annual employee contribution for employee single-only coverage for each month in 2015 as an amount equal to 9.5% multiplied by $11,170, which is $1,061.15, and then divides by 12 for a monthly premium of $88.43.

Regardless of Employee C’s actual wages for any month, including March and August, when Employee C has lower wages because of significantly lower hours of service, the coverage under the plan is treated as affordable.

Apothegm Software has a tool that analyzes a company relative to the “Pay or Play” regulations. PoP Navigator is the most comprehensive application on the market for providing information large employers need to navigate the ACA Employer Mandate. Visit us at apothegmsoftware.com or shouldipayorplay.com.